What is an Accredited Investor vs a Non-Accredited Investor?

If you’ve looked into group investments, real estate syndications, or crowdfunding, you’ve likely come across opportunities that require you to be an accredited investor. But what is an accredited investor vs a non-accredited investor, and how do you qualify? This is a common question for both new and experienced investors. Let’s go over what it means to be an accredited investor, why it matters, and the investment opportunities available to non-accredited investors.

The Securities and Exchange Commission (SEC) determines how an investor qualifies as an accredited investor. At least one of the following must be met in order to be considered an accredited investor:

• Net Worth: Have individual net worth, or joint net worth with spouse, that exceeds $1 million (excluding the value of primary residence).
• Individual Income: Have individual income exceeding $200,000 in each of the past two years and expect to reach the same this year.
• Joint Income: Have combined income with spouse exceeding $300,000, in each of the past two years, and expect to reach the same this year.
• Business: Invest on behalf of a business or investment company with more than $5 million in assets, and/or all the equity owners are accredited.

So why is it significant for an individual to be an accredited investor? Qualifying as an accredited investor opens up the opportunity to invest in asset classes such as real estate syndications, real estate crowdfunding, venture capital, and hedge funds.

The SEC created the above criteria in an effort to protect new or inexperienced investors from buying into high-risk projects. Additionally, there is less risk that an accredited investor will have insufficient funds in the event of a loss.

While the above criteria serve to protect non-accredited, or lower net worth investors from potentially losing big on riskier projects, it also excludes them from access to greater opportunities. The idea is that individuals who qualify as accredited investors have more money they can stand to lose on higher-risk projects. However, higher risk can also equal higher reward potential.

Sophisticated investor requirements, according to the SEC, must “have enough knowledge and experience in business matters to evaluate the risks and merits of an investment.” Sophisticated and accredited investors are often considered interchangeable; however, accredited is much more rigid.

The SEC ranks an accredited investor higher than a sophisticated investor. Although the SEC also states that “sophisticated persons” can lead accredited investors in the case of a trust, bank, nonprofit, or entity. The term “sophisticated” is considered more of a grey area than an accredited investor meeting set criteria.

The next obvious question would be, what is non-accredited? In this section, we’ll go over the definition of a non-accredited investor and if it’s an advantage or a disadvantage.

A non-accredited investor is anyone who does not meet the requirements of an accredited investor, as defined by the SEC. Another term used for a non-accredited investor is a retail investor. This includes any investor whose net worth is less than $1 million and has an income under $200,000 individually (or $300,000 with a spouse).

Most of the investing population is made up of non-accredited investors. This does not mean, however, that non-accredited individuals don’t have the opportunity to invest in a vast number of different projects. It simply means that you have different opportunities available to you. Options for non-accredited investors include equities, certain types of bonds and real estate.

Next, we’ll break down the different types of real estate investments, including crowdfunding and syndications. Find out when accreditation matters and when it’s not required.

Crowdfunding is raising smaller amounts of money for a project or investment from a large number of people, typically through the Internet. There are different types of crowdfunding, including equity, real estate, and peer-to-peer (P2P) lending. We will discuss these types of investments in more detail later in the article.

Often confused with a real estate investment trust (REIT), a real estate syndication is when investors own an actual share of the property itself. With REITs, you are simply investing money into a trust that purchases real estate.

Investors involved in a syndication are considered limited partners, as there are generally multiple parties involved. Syndications are set up using three key players: the key principal (or sponsor), the property management group, and the investor.

The key principal is leading the real estate project, locating the best markets to invest in, and underwriting the property. The property management group is responsible for the property’s day-to-day demands, like handling tenants, tending to maintenance issues, and renovating units. Of course, the investor provides the funding to make the project happen.

Traditionally, all crowdfunding (especially syndications) ventures required accredited investors, as enforced by the SEC. Today, three kinds of crowdfunding offerings exist, two of which allow non-accredited investors to participate.

Syndications are a different story. Syndications require more initial capital to participate; for example, a minimum $50,000 investment. Before committing, every syndication investor should review the deal’s private placement memorandum, which lays out the full terms, risks, and structure.

Select crowdfunding opportunities require a much lower investment, for instance, anywhere from $500 to $5,000.

The short answer is no. There are plenty of options in real estate crowdfunding for non-accredited investors. However, the amount of money non-accredited individuals can invest is regulated, usually based on a percentage of their income or net worth. This is because these types of investors inherently come with greater risk.

Those who qualify as accredited and sophisticated investors assume less risk than non-accredited investors because they have more money and (hopefully) know how to protect themselves from bigger potential losses.

You may also like Real Estate Syndications vs. Crowdfunding: Everything You Need To Know.

As mentioned previously, accredited investors have access to investments that are higher risk and higher reward. There are several different types of investments for those who qualify as accredited. There are also plenty of opportunities available if you are not accredited. Your interests, goals and expertise will help determine which investments are best for you.

There are investment opportunities for accredited investors:

• Real Estate Syndications
• Real Estate Crowdfunding
• Equity Crowdfunding (Venture Capital)
• Venture Capital & Private Equity Funds
• Hedge Funds
• Specialty Investment Fund

The good news is that in 2012, the Jumpstart Our Business Startups Act (JOBS) was passed to make it easier for small business startups to raise capital and boost economic growth through job creation.

In 2016, Title III of the JOBS Act took effect, allowing non-accredited investors to participate in certain investments, like crowdfunding, that were previously offered only to accredited investors. More and more online crowdfunding platforms are popping up with much lower minimum investment requirements (Fundrise, RealtyMogul, Rich Uncles, etc.).

The following investment opportunities are available to non-accredited investors:

• Equity Crowdfunding: Pooling money into a startup in exchange for equity shares. Be aware that even if the startup is successful, investors won’t see any return on investment until the company goes public. On average, a company takes over eight years to go public.
• Real Estate Crowdfunding: Options for real estate crowdfunding include two types: debt or equity. With debt, you’re investing in a mortgage for a commercial property. Earning a share of the interest on the loan as it’s paid back. Equity means investors own a share of the actual property. Investors will receive a percentage of the rental income and a portion of gains upon sale of the property.
• Real Estate Investment Trusts (REITs)
• Peer-to-Peer Lending (P2P): For those who want to invest in individuals as opposed to companies or real estate. P2P lending raises money for personal loans and the investor earns a return based on the interest of the loan.
• Startups and Business Financing
• Bonds

In order to open up the opportunity for non-accredited investors to participate in crowdfunding, the SEC has set up some restrictions as a means of protection. These restrictions are based on net worth and income, as stated previously.

The following investment limits apply to non-accredited investors:

• Individuals with annual income or net worth below $100,000 can invest up to the greater of $2,000 or the lesser of 5% of income or net worth.
• Individuals whose income or net worth is more than $100,000, may invest up to 10% of income or net worth (whichever is less), up to $100,000.

The first way to become an accredited investor is to earn a higher income. The old saying goes, “You have to have money to make money.” While this is true in many cases, there are ways to build wealth outside of ordinary income, which we’ll discuss below under “How to Qualify with Low Income.”

Additional ways to qualify:

• If you are married, use your joint income with your spouse to meet the accredited investor requirements.
• Use your net worth instead of income.
• If you are a director, executive officer, or general partner of a company.

Once an individual meets the accredited investor guidelines set by the SEC, the next step is to get verification.

Because investment types, like crowdfunding, are now available to non-accredited investors, the SEC implemented a new Rule 506(b) in 2013. All investors under the Rule 506(b) offering must take “reasonable efforts” to be verified as accredited investors.

There are four ways to verify accredited investors:

1. If an individual is a director, executive officer or general partner of a company.
2. Obtain a written letter from a registered broker, investment advisor, attorney, or CPA (all must be in good standing under laws and jurisdictions).
3. Prove income exceeds the required amount using tax filings or pay stubs.
4. Prove net worth exceeds the required amount using credit reports, liabilities, and assets.

Another way to become an accredited investor is to build wealth through assets such as real estate. The great thing about real estate is that you don’t have to make a lot of money to buy a distressed property in a lower-income neighborhood. Taking out a mortgage loan, adding a few improvements, and filling the property with tenants can produce monthly cash flow.

The SEC is required by law to review the definition of an accredited investor every four years, and there’s ongoing debate about whether the current criteria still work. The goal of the rules is to protect investors from riskier investments, but critics have long argued that the wealth-based thresholds don’t necessarily measure investment sophistication.

The debate generally centers on a few ideas:

• Whether the income and net worth bar is set too high or too low
• Replacing the wealth-based test with a knowledge- or sophistication-based test instead
• A sliding scale that lets more investors participate, but in amounts proportional to their wealth
• Some combination of the above

Because this review happens on a set schedule, the definition could shift in the future. If accreditation status matters to your investment plans, check the SEC’s current guidance periodically.

Whether you are an accredited or non-accredited investor, there are ample opportunities to earn money through investing. Remember, even accredited investors had to start somewhere. If you are a non-accredited investor, working to build wealth and become accredited, start investing small amounts of money in low-risk ventures. By doing so, you will better understand how and where to invest your hard-earned money and soon become a “sophisticated,” accredited investor. Any investment undertaken should always be approached with careful planning and consideration.

RealWealth Developments has a strong track record of finding and managing lucrative real estate investment projects. Interested in learning more about group real estate investment opportunities for accredited investors? Join RealWealth today!